CoreMacroeconomics 3rd Edition Chiang Solutions Manual
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CoreMacroeconomics 3rd Edition Chiang Test Bank
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Chapter
2
Check Your
Understanding
1.
When can an economy increase the production of one good without reducing the output of
a
n
o
t
her?
Answer:
When there are unemployed resources, and the economy is operating within the
p
r
o
d
uctio
n
possibilities
f
r
o
n
tier
.
2.
In which of the three basic questions facing any society does technology play the greatest role?
Answer:
Technology
will
be most important in the how to produce questio
n
.
3.
Explain the important difference between a straight line PPF and the PPF that is concave to (bowed away from) the o
r
igin.
Answer:
A straight line PPF curve has constant opportunity
costs,
whereas the bowed out
(concave
t
o the srcin) curve has increasing opportunity costs as the production of one good is increased.
4.
How would unemployment be shown on the PPF?
Answer:
Any time the economy is operating inside the PPF, some resources
will
be unemployed,
t
h
us any point inside the PPF represents
unemp
l
o
y
men
t
.
5.
List three factors that can contribute to an
economy
’
s gr
o
w
t
h
.
Answer:
Economies can grow through increases in the quality or quantity of labor, land, capital,
a
n
d
entrepreneurial activity. Increases in resources expand the PPF outward. Improvements in
t
ec
hno-
logical
progress can increase growth in an economy.
6.
How can a country that does not
have
an absolute advantage in producing goods
still
benefit from trade?
Answer:
All
countries can benefit from trade as long as they
specialize
in the production of the
g
oo
d
in which they have a comparative
advantage. All
countries have a comparative advantage in
p
r
o
d
ucin
g
something because comparative advantage deals with relative abilities rather than absolute abilities.
Apply
the Concepts
7.
China has experienced levels of economic growth in the last decade that have been about 5 times that of the United States
(10%
versus
2%
per year in the United States). Has China
’
s
high growth
ra
t
e
eliminated scarcity in China?
Answer:
No. Scarcity still exists in China. Growth alone does not eliminate
scarcity:
The PPF shifts outward, but
still
there are tradeoffs between products, and time is
still
a limited resource for us
all.
As rich as America is, we still face
scarcity.
Economic growth
typically
does improve standards of living, and the
level
(or degree) of scarcity declines.
8.
Describe
how a country producing more
capital goods
rather than consumption
goods
ends up in the
f
u
t
ur
e
with a PPF that is larger than a country that produces more consumption goods and
fewer
capital goods.
Answer:
Capital goods are those goods used to produce other goods. Producing more capital goods represents an investment in the economy. This investment leads to the ability of the country to
p
r
o- duce more goods and
services
in the
f
u
t
u
r
e
.
9.
The United
States
has an absolute advantage in making many goods, such as short-sleeved cotton golf shirts. Why do Indonesia and Bangladesh make these shirts and export them to the United States?
Answer:
Indonesia and Bangladesh, while smaller, have a comparative advantage in the
p
r
o
d
uctio
n
of shirts, making it profitable for both countries to
specialize
and ship shirts to the United States.
10.
Why is it that America uses
heavy
street cleaning machines driven by one person to clean the streets, while China and India use many people with brooms to do the same job?
Answer:
Both China and India have huge labor resources relative to available capital, therefore
t
h
e
job is done with a lot of labor and a little capital. The United States has less labor relative to capital, thus
wages
are higher, and capital is substituted for
la
bo
r
.
11.
If specialization and trade as discussed in this chapter lead to a win-win situation in which bo
t
h
countries gain, why is there often opposition to trade agreements and globalization?
Chiang_Stone3e_AS_1_20.indd A-5 7/29/13 1:54 PM
G o o d
1
CHAPTER
2
A-5
Answer:
While trade is typically beneficial to both countries in the aggregate, individuals
a
n
d
groups within each country lose when their product faces competition from a country with a
co
m-
parative advantage.
12.
American attitudes about the tradeoff between the environment and economic growth shown
in
By the Numbers at the eginning of the chapter changed significantly when the economy en
t
e
r
e
d
a recession. However, during the recession in 2009, Americans were roughly equally split between their concerns for the environment and economic growth. What would you expect to find in a similar survey in a
relatively
poor developing
na
tio
n
?
Answer:
People living on $1 to $2 a day in poor developing nations would probably be more focused on economic growth and undoubtedly find it difficult to fret about the environmental impacts. Once their income reaches a reasonable
level,
more of their attention would turn to protecting and im
p
r
o
v
-
ing the en
vir
o
nmen
t.
In
the News
13.
According to a March 8, 2012,
New York Times
report, the 2011 earthquake in Japan that triggered a devastating tsunami led to a near complete shutdown of
J
a
pa
n
’
s
nuclear energy industry, which generates one-third of the
co
un
tr
y
’
s
total electricity. The resulting energy crisis caused severe supply disruptions in nearly all industries. How do natural disasters such as the tsunami in Japan affect a
co
un
tr
y
’
s
ability to achieve economic growth? Illustrate your answer using a PPF.
Answer:
A natural disaster reduces the productive capacity of a country. In Japan, the loss of
p
o
we
r
prevented many factories from operating at full capacity, and many workers who were hurt in
t
h
e
disaster were unable to work. The loss of productive capacity is represented by the PPF shifting inward (from PPF
A
to PPF
B
), indicating a reduction in the maximum amount of goods that
ca
n
be
p
r
od
u
ce
d
.
Good
2
PPF
B
PPF
A
14.
The recession of 2007
–
2009 and its slow recovery led to severe budget cuts in state
g
o
v
e
r
n
men
ts across the United States. Public
colleges
and universities, which are highly subsidized by state gov- ernments, saw dramatic cuts in their budgets, making it more difficult for students to attend
a
n
d/
or complete their degrees. The
Chronicle
of Higher Education
of January 17, 2012, argued that
c
u
ts to higher education will
“
imperil competitiveness
”
in America. How might the cost savings
f
r
o
m
reduced educational spending end up costing states even more in the future?
Answer:
Investments in education result in an increase in long-term productivity through a
mo
r
e
productive workforce. By reducing education subsidies, a government can use the savings for o
t
her
short-term expenditures. However, the consequences of these cost
savings
may be felt in the long
r
un
if the United States continues to lose competitiveness with other countries that are increasing invest- ment in educa
t
ion.
Solving Problems
15.
Political commentators often make the argument that growth in another country (most
no
t
a
b
ly
China) is detrimental to the economic interests of the United
States.
Look back at Tables 2 to 4 in
t
h
e
Gains from Trade section of the chapter. Then, assume that Mexico doubles in size, and make
t
h
os
e
Chiang_Stone3e_AS_1_20.indd A-6 7/29/13 1:54 PM
A-6
ANSWERS
changes to Table 2. Reconstruct Tables 3 and 4 given M
exico
’
s
greater capacity. Has the United States benefited by Mexico being able to produce more?
Answer:
Table
2
Initial Consumption-Production
P
attern
United States
Me
xico
T
otal
Oil
20
20
40
Chips
20
8
28
Table
3
Production after Mexico Specializes in Producing Crude Oil
United States
Me
xico
T
otal
Oil
0
40
40
Chips
40
0
40
Table
4
Final Consumption Patterns after
T
rade
United States
Me
xico
T
otal
Oil
20
20
40
Chips
26
14
40
Both Mexico and the United States are better off.
16.
The table below shows the potential output combinations of oranges and jars of prickly pear jelly (from the flower of the prickly pear cactus) for Florida and Arizona.
a.
Compute the opportunity cost for Florida of oranges in terms of jars of prickly pear
jelly.
Do
t
h
e
same for prickly pear
jelly
in terms of oranges.
.
Compute the opportunity cost for Arizona of oranges in terms of jars of prickly pear
jelly.
Do
t
h
e
same for prickly pear
jelly
in terms of oranges.
c.
Would it make sense for Florida to
specialize
in producing oranges and for Arizona to specialize in producing prickly pear
jelly
and then trade? Why or why
no
t?
Florida Arizona
Oranges Prickly Pear Jelly Oranges Prickly Pear Jelly
0 10 0
500
50 8 20
400
100 6 40
300
150 4 60
200
200 2 80
100
250 0 100
0
Answer:
a.
Flo
r
i
da
’
s
opportunity cost of oranges: 2/50 =
.04,
or
.04
jar of
prickly
pear
jelly
for each orange. The opportunity cost of a jar of prickly pear
jelly:
50/2 = 25, or 25 oranges must be given up for each jar of prickly pear jelly.
.
Ar
izo
na
’
s
opportunity cost of oranges: 100/20 = 5, or 5 jars of prickly pear jelly for each o
r
a
n
g
e
.
The opportunity cost of a jar of prickly pear
jelly:
20/100 = .2, or .2 orange must be given up
f
o
r
each jar of prickly pear jelly.

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